Benefit Culture: Is It Time to Adapt?

Early on in my City career, I joined Hoare Govett Securities Limited as a trainee fixed income trader. Shortly afterwards that firm became ABN Amro Hoare Govett, and ultimately its fixed income team merged with ABN Amro (UK) Limited's bond trading team. When ABN Amro first set up in the U.K, its London office employed probably no more than 20 people. It offered a slightly peculiar employee benefit: free Evian water. Staff were entitled to help themselves to as many of these little bottles of water as they wished, and a fridge in the kitchen was stocked up daily to facilitate this benefit.

Fast forward a few years and ABN Amro (UK) Ltd didn't just employ 20 or even 200, but a few thousand people in London. What had turned out to be a minor expense, providing bottled water, had now turned into a major staff operating cost for the company. But when the Chief Operating Officer at the time proposed abolishing the benefit, on the reasonable grounds that employees were perfectly capable of getting their own water, staff were outraged. One can't get rid of this essential perk, we've always had it!

I left around this time to join Hambros Bank, so I never did find out what happened to this benefit. But it illustrates a common experience around the world: once a particular benefit gets introduced into society, it embeds itself into the culture. Individuals get used to it, and it becomes very difficult to even reduce the rate of growth of the benefit's cost, let alone propose reducing its scope or even abolishing it.

From today there are a number of welfare changes coming into effect that will have significant impact on large parts of UK society. These include changes to the way legal aid, housing benefit, disability benefit, council tax benefit and certain unemployment benefits are paid and also how much is disbursed. Benefit levels will also not necessarily be raised automatically in line with inflation.

Certainly at the individual level this will result in large numbers of people being worse off than before and as a result struggling to make ends meet. At least initially, as they come to terms with the changes. But the reforms themselves will only slow down the rate of increase of public sector welfare spending. A worthwhile statistic to remember is that in the UK since 2010 spending on welfare has increased by about 15 percent...if that is an "austerity" strategy being implemented, one would be interested to see a largesse strategy!

But over time, it becomes important to spend only what one earns. A life in debt, financed by banks or overseas institutional investors, is not sustainable indefinitely, either at the personal level or the corporate or government level. Given the UK's structural borrowing requirements, its low savings rate and its ageing population, not to mention its stagnant productivity levels compared to Asia-Pacific economies, one can see how welfare spending can't simply keep going up. Something's got to give.

But once a benefit is introduced, it becomes a devil of a job to control its growth let alone cut spending on it or remove it entirely. Just ask Evian customers…